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June 11, 2010

Don't Assume That Time In The Markets Lowers Risk (because it doesn't)

Many investors think that you make the risk of stocks magically go away just by owning them long enough which is simply not true. You hear it all the time, own stocks and think long term.

While everyone knows that since 1926, that stocks have returned approximately 10%, or 8% CAGR, that fact does not help someone who had their retirement invested 100% in stocks over the last few years. Assuming they didn't get scared out near the lows of last year, they are still down 20-30% and possibly as much as 50%.

The moral of the story is do not buy what the investerati are selling, that is, do not subscribe to the idea that you have to own stocks. If you do, be careful. Invest only a portion of those investable assets in stocks. Remember that bonds and CD's are just fine, not very sexy, but have to be a part of your portfolio, a big part of your portfolio, especially as you get closer to retirement.

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